Clear The Smoke On Phoenixing

Written by Geelong Business News on 20 July 2017.

Phoenix sculpture by Niki de Saint Phalle / Pixabay

When businesses in an industry are crying out for more regulation, it’s about as big a red flag as you get. That is what is happening in the insolvency and business restructuring industry, with Geelong insolvency firm, Jirsch Sutherland, raising the issue at a recent end of financial year lunch for local accountants and lawyers.

Guest speaker at the lunch was Professor Helen Anderson, who heads up the Phoenix Research Team, comprised of researchers from Melbourne University and Monash University. We spoke to Professor Anderson about what we should all – businesses and consumers alike – should know about phoenixing in Australia.

“Illegal phoenix activity involves companies being stripped of assets, and those assets being placed into the new company so the old company has little money available for creditors, which of course means there’s little money available for the liquidators to investigate whether there's been any improper action,” Professor Anderson said.

Illegal phoenix activity is a form of fraud, gaining its name from the new companies ‘rising from the ashes’ of the previous company and is used as a means to avoid paying creditors, tax and/or employee entitlements.

The federal government estimates the annual cost of illegal phoenix activity to the economy at anywhere between $1.9 and $3.2 billion every year. Professor Anderson said she has no reason to dispute the government’s figures, and suggested they could even be higher.

Phoenixing has come under the spotlight over the past month as media outlets swarmed over news of the alleged $165 million Plutus Payroll tax fraud syndicate and connections of the family of former deputy tax commissioner, Michael Cranston, to Plautus Payroll.

The high-profile case is at the very high of the monetary scale in Australia. The Phoenix Research Team’s investigations into phoenix activity over a number of years have shown that large numbers of phoenix companies operate in the micro market - firms with under $2 million in annual turnover - as well as in the SME sector - businesses with between $2 million and $250 million in turnover.

Professor Anderson said it’s impossible to tell just how prevalent illegal phoenix activity really is in Australia, as the available statistics fail to differentiate between legal business salvaging in the wake of insolvency, and the illegal practice we know as phoenixing.

That distinction, she pointed out, is an important one, with the rescuing, or buying, of the assets of a business with the aim of preserving jobs and repaying debts an important function of the economy.

“These businesses pay a fair price for the [salvaged] business and maybe save some jobs.”

The federal government estimates the annual cost of illegal phoenix activity to the economy at anywhere between $1.9 and $3.2 billion every year.

She said that while she was horrified at the scale of the alleged fraud in the Plutus, she was not wholly surprised by it and referred to the case of Philip Whiteman, an accountant in Richmond who was charged earlier this year for his alleged involvement in a multi-million dollar tax fraud scheme that saw ‘dummy directors’ – including a homeless man who was a previous client of the firm – named as directors of newly formed companies.

A report released by the Phoenix Research Team earlier this year revealed that it was too easy, and, according to Professor Anderson, far too attractive, to set up illegal phoenix companies.

The report recommended the introduction of a mandatory Director Identification Number (DIN) and greater transparency around the history of company directors.

“At the moment, phoenixing is far too attractive. It’s almost like it’s the stock in trade for pre-insolvency traders.

“I feel that if people were more aware that they could be far more easily tracked, they would be less likely [to engage in phoenixing],” Professor Anderson said. “I also believe that information from ASIC (Australian Securities and Investments Commission) should be far more readily available.”

She said it would not be fair to blame ASIC, pointing out that with more than 2 million Australian businesses on the books it would be impossible for any agency to effectively monitor them all.

Instead, she called for greater transparency, the availability of company registration information to much more widely available and free of charge, and for greater information sharing between agencies including ASIC, the Australian Tax Office (ATO), Federal Police and the Fair Work Ombudsman.

On the subject of unscrupulous pre-insolvency traders, she said there were already powers available to hold them accountable, “but they tend to not be held to account. It feels like it’s in the too hard basket for ASIC.

“More significant actions need to be taken against the most prominent ones. They’re fairly blatant about what they’re doing.”

“ATO and ASIC are stymied by company directors using slightly different versions or names, or – ha, ha – ‘making a mistake’ on the date of birth.”

Professor Anderson said she would receive at least one phone call a week from people being stung by illegal phoenix activity, and had herself been the victim of a contractor who had taken her deposit and then dissolved the company without delivery of goods of service.

“If I could have seen this was the fifth company he had run, alarm bells would have rung.”

She said the practice is wide spread, and used the example of people having invested in solar panels only to find that the company no longer existed when they sought to put in a warranty claim.

“You might have a 10-year warranty, but six months later that company is gone and your warranty no longer exists. It’s the same story with traffic fines, with unpaid accounts; it’s everything,” she said.

“If you could look up company directors and their history, I believe that it be far less likely to be happening.

“ATO and ASIC are stymied by company directors using slightly different versions or names, or – ha, ha – ‘making a mistake’ on the date of birth.”

She said the only way to curb illegal pheonixing was by far greater sharing of data between government agencies and having that information available to the public at no cost.

“As long as there is data sharing between these organisations, I believe that would make a real difference.”

Phillip McGibbon, Jirsch Sutherland Partner in Geelong, agreed with Professor Anderson, saying his firm believes the focus of ASIC and the ATO should be on four key elements: education, licensing, compliance and insurance.

“The same level of regulation should apply to these operators as is in place for those who provide financial advice,” he said.

“Phoenixing is nothing new, but what’s brought it back into the spotlight is a number of unscrupulous ‘pre-insolvency’ operators who have caught the eye of regulators. “Unfortunately, these are operators who offer restructuring or insolvency advice without the proper training or insurances – and the behaviour of the minority undermines the legitimate, regulated operators.

“Fortunately, fraudulent phoenix activity is in the crosshairs of ASIC, the ATO and the Fair Work Ombudsman. But, while there have been some prosecutions resulting in criminal charges, rogue operators are still a significant problem.

“While fraudulent phoenix activity remains an issue for Australia, the initiatives from the ATO and ASIC to combat this practice is a positive step that will help protect employees and suppliers from losing money to these rogue operators,” Mr McGibbon said.